New estimates of total factor productivity growth for developing and industrial countries

Abstract

The authors present new estimates of long-term total factor productivity (TFP) growth for 83 industrial and developing countries for 1960-87. These estimates are based on new data developed for the research project on total factor productivity growth (and available on diskette). Although based on the"old"growth theory, the estimates are derived from a cross-country production function using an error-correction model. This is more appropriate than the usual first-difference model for capturing long-term relations. The authors concluded the following: (a) The estimated cross-country production function shows that human capital accumulation is far more important in explaining growth than several earlier studies have indicated. This conforms with recent studies that find raw labor's share in income to be much less than thought previously. (b) Contrary to the results of other studies, TFP growth in high-income countries has been comparable to that in faster-growing low and middle income countries. (c) The fastest growing developing economies have based their growth more on the rapidity with which they have accumulated physical and human capital than on high TFP growth. (d) Cross-country differences in TFP growth are largely due to differences in the level of political stability and initial conditions (notably, initial per capita income and the initial level of human capital). (e) Cross-country differences in TFP growth (once corrected for initial conditions and political stability) cannot be explained by structural and policy differences for which data are readily available (despite and exhaustive search for other explanations). (f) Sub - Saharan Africa is the only region for which the actual TFP growth is significantly lower than the TFP growth predicted on the strength of initial conditions and political stability (by about 1.1 percentage points a year). The cross-country profile of TFP growth and the role of initial conditions point toward the dual role played by human capital in the development process: as a standard factor of production to be accumulated and as a source of learning and entrepreneurship and hence of interesting growth dynamics. It may be necessary to rethink the concept of"TFP as the residual"in models with human capital. The relationship between policy variables and TFP growth is likely to be sensitive tothe way human capital is incorporated in the production function. These substantive issues, along with a number of econometric refinements, are fruitful avenues for further research.

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